November 26, 2007

Sweatshops, sweatshops everywhere

The New York Times has discovered to its horror that Manhattan's manhole covers are made in India under working conditions that would be considered appalling by most of its readers.

Seemingly impervious to the heat from the metal, the workers at one of West Bengal’s many foundries relied on strength and bare hands rather than machinery. Safety precautions were barely in evidence; just a few pairs of eye goggles were seen in use on a recent visit. The foundry, Shakti Industries in Haora, produces manhole covers for Con Edison and New York City’s Department of Environmental Protection, as well as for departments in New Orleans and Syracuse.

The scene was as spectacular as it was anachronistic: flames, sweat and liquid iron mixing in the smoke like something from the Middle Ages. That’s what attracted the interest of a photographer who often works for The New York Times — images that practically radiate heat and illustrate where New York’s manhole covers are born.

When officials at Con Edison — which buys a quarter of its manhole covers, roughly 2,750 a year, from India — were shown the pictures by the photographer, they said they were surprised.

“We were disturbed by the photos,” said Michael S. Clendenin, director of media relations with Con Edison. “We take worker safety very seriously,” he said.

An embarrassed Con Edison says that it is now rewriting its international contracts to include safety requirements.

Fine, but what if these requirements now raise the cost sufficiently for the utility to want to switch its supplies to another source? And what if these West Bengali workers now find themselves out of a job, or earning less in even worse working environments? Would we have we done them any favors by becoming outraged at their condition?

This is one of the trickiest issues in international trade, and one for which there is no straightforward answer that I can think of.

Libertarians and fair-traders, which make an odd couple, do have a solution: they would say let consumers have information about the full hedonics--all the characteristics of a good, including the manner in which they are manufactured--and then let markets take care of it. So if Con Edison believes its customers value the welfare of West Bengali workers, it ought to be willing to pay for the extra costs its suppliers incur for running safe factories. No regulation is required; just better information.

But if you believe information and markets can address this problem, you must also believe that consumers have a good idea about the costs of improving workplace conditions and can solve complicated general-equilibrium models each time they decide how much to pay for toys from China or towels from Pakistan. For what is at issue is not just "do you care for workers over there?" but also "do you understand the full general-equilibrium consequences of what would happen to the workers concerned?" Market intermediaries can help, but we need to ask in turn who will keep them straight and honest.

Comments

And yet there is a third solution. If the companies involved required that anyone who produced products meet a minimum level of worker safety then the playing field is leveled and the market can compete based on the required minimum content of the contract. Human life and safety is a cost of doing business pretending we can ignore that is short sighted role segregation.

The unstated assumption is that Con Ed is supposed to earn a certain rate of profit. So if their costs go up then the only alternative is for them to charge more for electricity.

Corporate behavior is based upon the design of maximizing profit. This does not have to be the case. Corporations are creatures of the state and as such they can have whatever goals or constraints society sees fit to impose.

The US just happens to be in the thrall of laissez faire capitalism, some places in Europe do better.

So there are three alternatives, not two. Better working conditions for those in India, higher costs for New Yorkers, or smaller profits for Con Ed.

I've never understood the outrage over sweatshops. People choose to work in deplorable conditions. The horror isn't that they have that choice available to them, it's that their alternatives are so limited that working in the sweatshop is their best option. Sweatshops aren't the problem, they are a symptom.

Making companies improve their safety standards helps some workers, but by raising the cost of production it puts others out of work, and deters future investment. It's not clear that it's a net benefit for the workers at all, and there are certainly better ways to help them.

The "sweatshop issue" is a waste of time, resources, and most importantly goodwill- people are only going to support a finite number of causes. In picking which ones to advance, we can and should do a lot better than this one.

I don't know. But I do know that at least some of safety regulations/equipment are of the fixed cost variety - install air conditioning - rather than a marginal/per worker variety. In which case, it would come out of profits rather than wages or employment (though there is the issue of exit and entry).

Its OK to follow our hearts and moral intuitions on these matters. The time has passed when proponents of industrial market societies get a free pass on rationalizing extremes of explotation. We pride ourselves on passing on the wisdom of capitalist markets to our developing world brothers and sisters. But what they really need are our accumulated, hard won wisdoms on Social Democracy, worker's rights, environmental sustainability, the inherent worth and dignity of each and every person.

I thought the article was a pretty fair description, rather than a knee-jerk sort of response. The reporters didn't seem to be necessarily passing judgement. They even noted, "The men making New York City’s manhole covers seemed proud of their work and pleased to be photographed doing it." It didn't sound like slavery to me. It seemed like a good and honorable job, albeit, a brutally difficult one.

Some of the other commenters are forgetting that our social democracy is a luxury of our wealth. If all they need is cheap changes like gloves, then why not spend their wages on it? It will come out of their wages anyway. In our history, we had child labor, long hours, and hard conditions. Were we coerced? Did we love our children less then? Or were we just too poor to afford those luxuries?

For a useful discussion about the issues raised by Dani Rodrik, we need more facts comparing the social situation in Indian and American foundries with data such as:
-- hours worked per day and per week;
--the number of paid vacation days, paid holidays, paid sick leave days and paid "family days" per year
-- hourly wages vs. unit labor costs
-- health insurance coverage
-- retirement benefits from private pensions and Social Security
-- laws against racial, gender, and other forms of discrimination, and their enforcement
-- taxes paid by business for public schools and other public purposes

With such information in hand, we have a context to help address questions more fundamental than those raised by Dani Rodrik: What kind of sociey do we Americans want for ourselves and our children? What kind of society should we promote, through our trade and investment policies, for people who work for us in other lands?
Global competition affects the quality of life across the board. Why wouldn't it? So, as globalization continues under present trends, the United States will bcome more like India. And, if situations like those at the Bengal foundries continue, much of India will remain primitive even as it enriches the economy of New York City.

There are two unspoken assumptions that drive most writings by economists on the topic of sweatshops: that they are governed by the logic of compensating wage differentials, and that health outcomes should be viewed only as “amenities”, not as economic factors in their own right. I think both tend to be more wrong than right.

1. Is it generally the case that the cost of improving safety equals the value of this improvement for the worker in real-life jobs? The answer would be yes if we had perfectly compensating wage differentials for dangerous work, but the evidence is clear, I think, that such compensation tends to be partial at best and may vanish altogether for the most vulnerable workers, such as those making Con Ed’s manhole covers. I strongly suspect that, if we did a walkthrough at that workshop in India, we would find inexpensive methods for achieving large health improvements. Nearly every professional safety consultant has had this sort of experience. There is no financial benefit for the owners of the shop to do this on their own, however, because they face a non-clearing labor market.

2. The article hints that official records, which show few if any injuries, are misleading. This is a problem not only for the workers directly involved, but also their communities. Studies in the developed countries show that something on the order of 3% of GDP is lost each year to industrial injuries and illnesses; do we think that the effects are smaller or larger in the developing world? Unfortunately, there has yet to be a careful study of the question (this ought to be a very high priority), but I think we can at least say that the assumption of minimal economic costs is unwarranted. Yes, there is a labor surplus in India, but the high level of uncontrollable health risk undermines a sense of personal agency and incentives for building human capital. True, expensive hospital costs, which play a big role in developed countries, do not await workers who sustain injuries in this Indian workshop, but those who become disabled do not simply disappear. They must be cared for by their families, generating invisible but nonetheless real costs in lost market and household production, not to mention lost educational opportunities if the caregivers are children. On a more general level, the tendency for recent research to place health on a more or less equal footing with education as a determinant of economic growth should bias us toward assuming that the health costs of sweatshops matter.

I agree that, all of these arguments notwithstanding, there is still a risk that well-meaning efforts in New York could lead to hardship in West Bengal. The better alternative is not shutting down the sweatshop but making it a more acceptable place to work. This means developing partnerships with groups in India and elsewhere that can see to it that reforms make sense locally. It also means some transfer of resources, so that the costs of improving work fall on those, like firms that profit from workers’ destitution or more affluent Northern consumers, who are better placed to absorb them. Both stipulations are central to genuinely fair trade.

I have trouble buying into the whole, "safety is cheap, they just have no incentive..." argument. It makes me wonder why there is no incentive. If workers value their own safety and improving safety is very cheap, then there is free money to be had by starting up a bunch of safe factories in India (and other places). Setting up a bunch of these factories would be a great way to prove your point and make a bunch of money, as well as help people.

If you aren't on your way to India, then we have to think of a reason workers won't value safety. Are they too dumb to value saftey? Are they not able to tell a safe factory from an unsafe one? This doesn't seem very likely to me (especially if we can tell an unsafe one from a picture).

"South African mine workers are planning a one-day nationwide strike in protest at poor safety in the country's mines."

Someone should tell these miners that, according to economic theory, the strike is irrational. The level of safety (180 fatalities so far this year) is optimal; if the strike forces safety to improve, wages will have to fall and the workers will be worse off.

Let's see how we improve the safety of the steel workers - install machines that carry the molten metal that can be operated from an air-conditioned room. The worker would be safe and comfortable. But not the same workers who you see in the picture. That would be a worker with at least post high school education and people in the picture would have lost their jobs.

It isn't irrational that workers would have a trade off between safety and wages, the question is, why aren't they already at the optimal point? One answer might be that workers aren't able to collectively bargain for working conditions or that it is costly. In that case, a safety increase that costs 10 cents per worker per hour might be worth 50 cents in wages.

But if that is true, there is still free money on the table. You could start a factory that pays less in wages and is safer. Workers will gladly accept a decrease of 50 cents in wages for an increase in safety that costs 10 cents. So the rest is profit for you. If you are truly altruistic, I suppose you could only decrease their wages 40 cents, then both parties would be better off. Thus, if you believe there are free profits on the table, why not just take them. Why do we need government intervention?

The challenge then is coming up with coming a proposal for government to intervene that doesn't mean free money on the table right now. Perhaps, you have a good reason in mind. If so, please share.

I don't mean to be implying that that such a situation is impossible, but we should put our assumptions on the table, I think, so others can judge if they seem reasonable.

On Dani's "libertarian" solution: The problem here is that my desire that workers who make manhole covers have safe working conditions is a desire for a public good. I can't bring it about myself. No matter what others decide, I do better by not paying higher prices for the (hypothetical) safely producuced manhole covers - either enough of you do so that I get the good, safe workers, without paying for it; or not enough of you choose the safely produced covers to make a difference, in which case my marginal purchase cannot turn the tide. The Indian entrepreneur who produces covers under safe conditions will thus fail, even though, potentially, the benefits of safety exceed the costs. Say we all like dolphins and value their safety, each of us, at more than the added costs of fishing for tuna in ways that don't harm the dolphins. The entrepreneur who concluded that therefore he could make money selling dolphin-safe tuna at higher prices was the entrepreneur who didn't come to ECON 101 for the lectures on public goods!

Why aren’t most workplaces at an “optimal” point wrt wages and safety?

There isn’t necessarily an optimal point. Monetary and nonmonetary outcomes may be incommensurable. Certainly the vast literature on risk perception and behavior is at least as consistent, if not more, with the hypothesis of incommensurability than with that of a universal, single-valued hedonic calculus. (Suggestion: economists who take evidence seriously have to purge themselves of utility theory.)

Labor markets tend not to clear. Workers queue for desirable jobs. Undesirable characteristics that separate the good from the bad jobs tend to cluster under such circumstances.

Related to this is the diversity of employer strategies for motivating the workforce. Building loyalty is one such strategy, and it normally entails nontrivial investments in safety and other workplace improvements. Using the threat to fire (efficiency wages) is another, and it can be shown formally that in such a case wage compensation for risk will be less than complete.

The labor relationship is not a one-shot game; it is repeated. No one has yet given us a model of wage compensation for risk in such a game that permits us to say with confidence exactly what conditions need to be fulfilled. (Perhaps a reader of this blog with free time to kill will do this.)

Workers are subject to denial (cognitive dissonance avoidance), in which awareness of risk is suppressed in the interest of psychic well-being. There is massive evidence of this in industrialized countries, and I would be surprised if the situation were different in much of the developing world.

Employment relations are normally embedded in larger cultural systems of provision and dependence. That is, workers typically look on employers not simply as contractual buyers of their services, but also as those who have taken on a duty of protection in return for some measure of obligation or loyalty. What this means in particular will differ, of course, from one culture to another. In most cases, however, the employer’s duty is perceived to encompass some degree of safety provision. This cultural expectation is explicit even in the wording of the US OSH Act. Contractual negotiation over safety, particularly where risk is seen as discretionary on the part of the employer, is inconsistent with such cultural patterns. To put it into familiar social science language, the rules of the moral economy often trump those of the pecuniary economy. (There are other potential cultural patterns that may interfere as well: “macho” conceptions of certain types of physical work, for instance.)

Well, there’s certainly more, but this should give a flavor. Economists have much to offer in the analytical tools they can bring to bear on problems, but they should not think that complex, multi-sided issues like occupational safety can be understood in conventional economic terms alone. Psychologists, sociologists, management specialists, legal theorists, historians – they have something useful to say too. Economists should keep asking their questions, but they should expect the answers to be interdisciplinary. Enough soap-boxing for today.

Kevin, you are quite right about the public goods aspect of the international labor standards problem. My one qualm, though, is that we have to keep in mind the possibility that what strokes the conscience of well-off consumers may not be what developing country workers want or need. This gets back to the old question of charity vs agency as responses to oppression and inequality. But I know we agree on this....

"“We were disturbed by the photos,” said Michael S. Clendenin, director of media relations with Con Edison. “We take worker safety very seriously,” he said.

Now, the utility said, it is rewriting international contracts to include safety requirements. Contracts will now require overseas manufacturers to “take appropriate actions to provide a safe and healthy workplace,” and to follow local and federal guidelines in India, Mr. Clendenin said."--From the article in the New York Times

First: How can NYC purport to be anti sweatshop and base its contracts on the lowest bid. Without standards that all bidders have to meet what does the city think they are promoting.

Second: Developing countries can have wonderful laws on the books protecting workers but they are Potemkin laws. In the main they are not enforced and even if a developing country might want to enforce its laws and regulations many simply don't have the resources. Following local and federal guidelines in India means India enforcing its guidelines, otherwise Con Edisons concerns over worker safety are meaningless words.

Third: Doing contracting through a middle man (another point made in the article) doesn't make the city any less responsible for the conditions under which its contracts are being filled. This is particularly true of governments since they don't have the extra burden of having to compete in the market place or go out of business.

Fourth: Arguments such as improve my conditions and you'll put me out of a job seem spurious to developmental policies. They're more of an excuse for permanent sweatshops than development.

In the future maybe Dani will be able to write a piece entitled "Sweatshops, sweatshops everywhere, but none New York City helped to promote."

Dani; I agree that this is a tricky issue, and I'm afraid that the best we can do is to choose the least worst path, whatever that is. However, I'm curious as to how much you think economic planning, i.e. investment in social overhead capital and other measures that promote export capitalism, are at the root of such problems? As I noted on your 19 November post on growth, such policies may force people out of their admittedly lower income but frequently sustainable practices, leaving them with no choice except wage labor, frequently in the employ of less-than-stellar employers. Ellenita Muetze Hellmer's article, "Establishing Government Accountability in the Anti-Sweatshop Campaign", is now online:

It makes the case that libertarians' knee-jerk defense of sweatshops is misguided. However, her analysis isn't going to warm the hearts of central planners, either.

Robert; I'm still not sure how to reconcile your claim that corporations are creatures of the state (correct, in my view) with a statement like, "The US just happens to be in the thrall of laissez faire capitalism...." Was the latter intended as sarcasm? I'm pretty sure the US happens to be in the thrall of state capitalism of which Con Ed could be Exhibit A.

Eric H:
The apparent contradiction that you see is due to the fact that we don't have a functioning democracy in the US.

The government creates the rules under which corporations operate, but the corporations control who gets elected and what policies they promote.

We are in a mixed environment, some laws which control corporations are from the period when tighter regulation was in vogue. More recently these have been weakened or abolished and the pressure is on to do this even more.

You can call legislation sponsored by corporations whatever you wish, "laissez faire" is, perhaps, not accurate, but that is the term that is frequently used.

I'm open to another term, if you have one to suggest.

Societies have different power centers. Historically these have included the army, the church, the aristocracy and landowners. In the US there was a period from about 1920 to 1970 when it included workers. Now we seem to have only two power centers: corporations and the military. These chose to exercise power using economic tools rather than the rack or gulag as in other cases.

I find this post perplexing. How does Mr. Rodrik know that these workers have steady jobs in the foundry? All we really know is that the pictures show men working in unsafe conditions. All else is conjecture, unless Mr. Rodrik knows something that is not in the article. You cannot lose something you don't have. We don't know how or when the workers are paid. One has only to look to the coal mines of Virginia at the turn of the century to see that there's more than one way to take advantage of a worker. It's hard for me to believe that this factory is so blatantly unsafe, yet is fair with its workers in wage matters, as many of the posters seem to think is the case.

True, there are some simple things that can be done to make it safer. Enlightened self-interest suggests these should be done. But a small foundry (ie one that does job lots that are too small to mechanise) is always gonna be a hot loud ugly dangerous place, with plenty of dramatic photo-ops, wherever it is.

The answer above - that even the worst sweatshop is better than subsistence (or worse, sub-subsistence) farming is correct. It's shown to be by the number of peasants who have flocked to them since the beginning of the industrial revolution.

Making companies improve their safety standards helps some workers, but by raising the cost of production it puts others out of work, and deters future investment. It's not clear that it's a net benefit for the workers at all, and there are certainly better ways to help them.

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